Iranian sanctions: What’s lifted, what remains?

AIG’s David Halperin looks at the impact on U.S. companies of the lifting of certain Iranian sanctions, and highlights the measures to mitigate any competitive disadvantage.

Joint Comprehensive Plan of Action

In July, 2015 the Joint Comprehensive Plan of Action (JCPOA) was developed by the P5+1 countries (United States, United Kingdom, France, Russia, China and Germany), the European Union and Iran. The cornerstone of the JCPOA was that, in exchange for Iran undertaking certain measures to curtail its nuclear development program, certain sanctions against Iran would be eliminated or relaxed.

The U.S. sanctions regime, administered by the U.S. Department of Treasury’s Office of Foreign Assets Control (OFAC), against Iran is broad and comprehensive, and applies to both U.S. persons as well as non-U.S. persons. For U.S. persons, regulations prohibit nearly all trade, investment, and other transactions involving Iran, and extend to a broad range of activities including Iranian exports and imports of goods and services, dealings in Iranian-origin goods and services, and financial dealings with Iran. For non-U.S. persons, since they are outside the jurisdictional reach of OFAC, these sanctions are enforced indirectly by limiting the non-U.S. perpetrator’s access to the U.S. commercial markets and U.S. financial system.

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Implementation Day

The critical date for the JCPOA was January 16, 2016, namely “Implementation Day.” This marked the day when the International Atomic Energy Agency verified that Iran has, in fact, implemented the nuclear-related measures it had committed to as part of the JCPOA. As the quid pro quo for Iran’s action, certain sanctions relief became immediately effective. This included the lifting of most E.U. and U.N. sanctions against Iran.

However, the current state of U.S. sanctions is more complex. Most U.S. sanctions targeting non-U.S. persons who deal with Iran (known as “secondary sanctions”) were lifted. However, the bulk of U.S. sanctions against Iran applicable to U.S. persons remain in force (known as “primary sanctions”).

Because most U.S. sanctions remain intact for U.S. persons (including U.S. companies and their worldwide subsidiaries), U.S. companies could well be placed at a competitive disadvantage relative to non-U.S. domiciled companies. For example, since EU sanctions and U.S. sanctions for non-U.S. persons have been relaxed, EU-domiciled companies are now be able to pursue transactions that they could not pursue prior to Implementation Day. U.S.-domiciled companies may still not be able to engage in these transactions because their non-U.S. subsidiaries are considered U.S. persons and the broad U.S. sanctions applying to them remain essentially unchanged.

General License H

OFAC recognizes that this result places non-U.S. subsidiaries of U.S. companies in a competitive predicament. To address this issue, OFAC issued General License H allowing non-U.S. subsidiaries of U.S. companies to engage in activities that would otherwise be prohibited. To the extent non-U.S. subsidiaries are able to engage in transactions under General License H, at a minimum they would have to act largely independently from their U.S.-parent when considering business involving Iran. This means that no U.S. person may be involved, directly or indirectly.

General License H addresses the concern that, even if foreign subsidiaries may proceed with certain transactions, the U.S.-parent and U.S. persons still must adhere to U.S. sanctions and cannot facilitate Iranian activity by its foreign subsidiaries. General License H allows for limited involvement by the U.S.-parent, e.g. making available to its foreign subsidiaries the company’s automated systems (such as e-mail systems), but does not permit the U.S.-parent to be involved in the ongoing operations or decision-making of its subsidiaries relative to Iran.

"General License H addresses the concern that, even if foreign subsidiaries may proceed with certain transactions, the U.S.-parent and U.S. persons still must adhere to U.S. sanctions and cannot facilitate Iranian activity by its foreign subsidiaries."

As non-U.S. subsidiaries of U.S. companies look to utilize General License H, they will need to put in place protocols to ensure that they function autonomously, without involvement from their U.S.-parent company or any U.S. persons.